On the Relative Rotation Graph for US sectors, there are solely two sectors which can be main the market larger. Not surprisingly these are growth-related sectors, XLK and XLY. Collectively these two sectors make up 40% of the market capitalization of the S&P 500 index.
In final Tuesday’s episode of Sector Spotlight, I identified that the opposite offensive sectors are nonetheless in relative downtrends and that each one defensive sectors are nonetheless in relative uptrends. They (defensive) are contained in the weakening quadrant which implies that their uptrends are nonetheless intact however dropping traction. Given their distance from the 100-level on the JdK RS-Ratio scale, there may be nonetheless an excellent probability for them to curve again up and return to the main quadrant.
However the power within the S&P is there, which can’t be denied.
On this weekly chart, SPY is breaking above its earlier excessive which places an finish to the rhythm of decrease highs and decrease lows. It doesn’t instantly sign a brand new uptrend, however merely the transition right into a extra sideways transfer.
My huge query is: How sustainable is that this transfer?
And it’s primarily based on the observations that solely a handful of shares contained in the Shopper Discretionary and Know-how sectors are displaying relative power vs their respective sector indexes.
The RRG above exhibits the tails for shares which can be at a optimistic (or virtually) RRG heading. Making use of this filter solely leaves eight out of the highest 50 Shopper Discretionary shares together with heavyweights AMZN and TSLA.
Making use of the identical filter on the universe of the highest 50 Know-how shares, additionally solely leaves eight tails which can be shifting at a robust RRG-Heading together with AAPL which by itself is already 25% of the market cap of the sector.
Solely eight shares per sector which can be choosing up extra relative power makes the participation base for this rally very low.
One other approach of utilizing the RRG visualization to try breadth is to plot the members of every sector not in opposition to their sector index however in opposition to $ONE. This takes the relative part out of the graph and exhibits absolute value traits.
The easy interpretation is:
- LEADING : Uptrend and pushing larger on sturdy momentum
- WEAKENING : Uptrend however momentum getting weaker
- LAGGING : Downtrend and pushing decrease on weak momentum
- IMPROVING : Downtrend however momentum is choosing up
Beneath is an up to date model of the graph which I put collectively about two months in the past, Displaying these RRGs for all sectors (and at sector degree in opposition to SPY).
Wanting over all these RRGs it is rather clear that the market is recovering. There are a number of blue tails. However it’s also clear, no less than IMHO, that that’s what it’s; a restoration. There are nonetheless only a few inexperienced tails.
Yet one more breadth chart that I monitor is the variety of new 52-week highs, together with a 13-week (1 quarter) shifting common.
The opaque pink line is $NYHGHW with its 13-week MA thick blue. The dashed pink line is the $SPX as a reference.
The collection of decrease highs and decrease lows within the $NYHGHW could be very a lot intact and the metric is at low ranges from an absolute perspective. However the MA continues to be shifting decrease and never but displaying indicators of a reversal. Sure, I do know it is a contrarian indicator however I additionally know that a majority of these indicators can keep low longer than you’d anticipate.
All in all, issues nonetheless maintain me cautious. Solely two sectors lead by way of relative power. Inside these sectors, solely a handful of (huge cap) shares are doing the exhausting work. And from a value perspective, the vast majority of shares are nonetheless in a downtrend regardless of the current rally within the S&P 500.
It is vitally nicely potential that the low for this transfer is in place however even when that may be the case I anticipate the market to hammer out a extra stable base and get broader participation to the upside. Till then the muse stays shaky.
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RRG, Relative Rotation Graphs, JdK RS-Ratio, and JdK RS-Momentum are registered logos of RRG Analysis.
Julius de Kempenaer is the creator of Relative Rotation Graphs™. This distinctive methodology to visualise relative power inside a universe of securities was first launched on Bloomberg skilled companies terminals in January of 2011 and was launched on StockCharts.com in July of 2014.
After graduating from the Dutch Royal Navy Academy, Julius served within the Dutch Air Drive in a number of officer ranks. He retired from the navy as a captain in 1990 to enter the monetary business as a portfolio supervisor for Fairness & Regulation (now a part of AXA Funding Managers).